Summary
In Alpha Capital, the Southern District granted an injunction based on the reasoning that "irreparable harm exists where nothing in the record suggests that a defendant will be able to pay a judgment."
Summary of this case from AJW PARTNERS, LLC v. CYBERLUX CORP.Opinion
No. 02cv10237 (GBD); 03cv00009; 03cv00512
February 11, 2003
MEMORANDUM OPINION AND ORDER
The plaintiffs in these three consolidated actions have each filed a motion for a preliminary injunction pursuant to Federal Rule of Civil Procedure 65 against defendant Advanced Viral Research Corp. ("Advanced Viral"). Plaintiffs seek an order directing Advanced Viral to deliver certain shares of Warrant common stock exercisable by the language of the original Securities Purchase Agreement among the parties. For the reasons set forth below, plaintiffs' motions are granted.
By request of the parties. this Court issued an Order consolidating these cases on February 5, 2003.
Facts
On or about September 9, 2002, plaintiffs purchased shares of defendant Advanced Viral's common stock pursuant to a Securities Purchase Agreement. Plaintiff Alpha Capital Aktiengesellschaft ("Alpha Capital") purchased 3,571,429 shares for $0.14 per share. Plaintiff Bristol Investment Fund, Ltd. ("Bristol") purchased 2,857,143 shares for $0.14 per share. Plaintiff StoneStreet Limited Partnership ("StoneStreet") purchased $750,000 of Advanced Viral stock for $0.14 per share. As part of the Securities Purchase Agreement, each plaintiff also acquired a Warrant to purchase additional shares of common stock (the "Warrant Stock").
The precise number of shares StoneStreet purchased is not included in its motion papers.
There are two key dates in the Warrants: 60 trading days (the "First Determination Date") and 120 trading days (the "Second Determination Date") after plaintiffs purchased the common stock and Warrants. The Warrants provide that on these two dates, the number of shares which plaintiffs will receive upon exercise of the Warrants will be adjusted in accordance with a formula set Forth in the Warrants. The Warrants, therefore, provide protection to plaintiff against a possible decline in Advanced Viral's stock price by requiring an adjustment to the exercise price for the Warrant Stock if the market price falls during the first 60, and 120 trading day periods.
The First Determination Date was December 3, 2002. All three plaintiffs duly submitted their Warrant exercise forms and tendered the Warrant exercise price for the additional shares that were due. Alpha Capital claimed that under the formula set forth in the Warrant, it was entitled to 1,330,532 additional shares of stock. Bristol and StoneStreet, respectively, claimed that they were entitled under the same formulation to 1,132,617 and 1,959,931 additional shares of stock. Defendant currently has over 400 million shares of stock outstanding.
There is no dispute regarding the clearly expressed language of the contract which provides for the exercise of the Warrant stock purchases. Advanced Viral, however, refused to issue the Warrant Stock to any of the plaintiffs. Defendant argues that it was fraudulently induced by false representations that the plaintiffs were purchasing the stock on September 9 for investment only, and that each was a separate investor not acting in concert or as a group. Advanced Viral claims that plaintiffs immediately manipulated the price of the shares downward by shorting and dumping the stock in order to assure that it would be issued a greater number of Warrant shares.
On December 17, 2002, Advanced Viral and its largest shareholder filed suit against the plaintiffs in Florida state court alleging that they engaged in a market manipulation scheme violative of the Florida securities laws.
Discussion
A party may move for a preliminary injunction pursuant to Federal Rule of Civil Procedure 65. See Fed.R.Civ.P. 65. The movant normally must show: "(1) irreparable harm in the absence of the injunction, and (2) either (a) a likelihood of success on the merits or (b) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in the movant's favor." Merkos L'Inyonei Chinuch, Inc. v. Otsar Sifrei Lubavitch, Inc., 312 F.3d 94, 96 (2d Cir. 2002); Forest City Daly Hous., Inc. v. Town of North Hempstead, 175 F.3d 144, 149 (2d Cir. 1999). However, where a party seeks a mandatory injunction so as to alter the status quo, rather than merely maintain the status quo, the movant must meet a higher standard. A court will order a mandatory injunction only where the movant has made a "clear" showing that it is entitled to preliminary injunctive relief, or where extreme or very serious consequences will arise from the denial of the relief. See Tom Doherty Assoc., Inc. v. Saban Enter., Inc., 60 F.3d 27, 34 (2d Cir. 1995); see also Malentzos v. DeBuono, 102 F.3d 50, 54 (2d Cir. 1996). Where a mandatory injunction is sought, the movant, therefore, must show a "clear" or "substantial" likelihood of success on the merits, as opposed to merely a likelihood of success on the merits. See Tom Doherty Assoc., 60 F.3d at 34;Forest City Daly Hous., 175 F.3d at 149-50.Plaintiffs argue that they have met their burden of showing a "clear" or "substantial" likelihood of success on the merits. In support of their contention, they argue that the Warrants contain clear and unequivocal language which obligates Advanced Viral to deliver the Warrant stock on the Determination Dates. The Warrants provide:
Warrant Adjustment. Sixty (60) Trading Days following the Original Issue Date (the " First Determination Date "), a number of shares of Warrant Stock shall become exercisable at $.001. The amount of shares of Warrant Stock exercisable at $.001 per share shall be equal to the positive difference, if any, between (i) $3,010,000 divided by the VWAP [Volume Weighted Average Price] of the Issuer's Common Stock for the sixty (60) Trading Days preceding the First Determination Date and (ii) 21,500,000. One hundred twenty (120) Trading Days following the Original Issue Date (the " Second Determination Date "), a certain number of remaining shares of Warrant Stock shall become exercisable at $.001. The amount of shares of remaining Warrant Stock exercisable at $.001 per share shall be equal to the positive difference, if any, between (i) $3,010,000 divided by the VWAP [Volume Weighted Average Price] of the Issuer's Common Stock for the sixty (60) days preceding the Second Determination Date and (ii) 21,500,000 . . . .
Alpha Capital's Order to Show Cause, Exh. B, ¶ 4(i) (emphasis added). Plaintiffs contend that Advanced Viral's failure to deliver the Warrant Stock after the First Determination date is a breach of the contract. Plaintiff also contends that this constitutes an anticipatory breach with respect to the Second Determination Date.
Advanced Viral readily admits that it did not deliver the Warrant Stock. It argues, rather, that plaintiffs made fraudulent misrepresentations so as to induce Advanced Viral into the contract, and that plaintiffs are not entitled to the requested equitable relief as they are guilty of "unclean hands." Advanced Viral contends that plaintiffs violated two provisions of the Securities Purchase Agreement. First, Advanced Viral contends that plaintiffs agreed in the contract to hold the stock for investment purposes only, rather than to sell it, and that from September 12, 2002 to sometime in October 2002, plaintiffs surreptitiously directed a Canadian brokerage firm and others to short sell their shares of defendant's stock, in violation of the Agreement. Advanced Viral contends that plaintiffs activities on the market caused the price of the stock to fall from $0.14 on September 12 to $0.09 by their last trade in October. Advanced Viral argues that but for plaintiffs activities, the stock price would have remained at or near $0.14 per share and plaintiffs would have no basis to claim that they are entitled to the adjustment in the Warrants.
The Securities Purchase Agreement provides for the following:
(h) Acquisition for Investment Only. Purchaser is purchasing the Securities for its own account for investment, and not with a view toward the resale or distribution thereof except as permitted under the Securities Act. Purchaser has not offered nor sold any portion of the Securities being acquired nor does Purchaser have any intention of dividing the Securities with others or of selling, distributing or otherwise disposing of any of the Securities either currently or after the passage of a fixed or determinable period of time or upon the occurrence or non-occurrence of any predetermined event or circumstance; provided, however, that by making the representations herein, Purchaser does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act and in compliance with this Agreement.
Alpha Capital's Order to Show Cause, Exh. A, ¶ 12(h) (emphasis added). Although the clause states that the purchaser is not purchasing the stock with "a view toward the resale" of the stock, it does not prohibit the purchaser from selling any amount of stock at any particular time. In fact, the clause explicitly states that the Purchaser does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time.Id. This Court cannot agree with defendant's contention that the clause forbids plaintiffs from selling their shares after purchase. Nor does the immediate sale of stock give rise to the inference that plaintiffs somehow fraudulently induced defendant into signing the contract in order to sell the stock to depress its price and thereby obtain a greater number of shares pursuant to the Warrant provision. In fact, what the evidence demonstrates is that from May 4, 2002 to May 10, 2002, the stock price rose from $0.12 to $0.17 per share. It traded at a high of $0.30 per share on June 30, 2002. By September 9, 2002, when plaintiffs purchased their shares at a price of $0.14 per share, it was trading at $0.16 per share. On September 13, 2002, when the stock began to trade at $0.14 per share and below, plaintiffs began to sell some of their stock. The stock price has yet to recover. The stock currently sells at $0.08 per share. There is presently no evidence before this Court that plaintiffs had a fraudulent scheme to buy stock and depress its price in order to buy more Warrant shares.
Defendant also argues that plaintiffs acted in concert together and shorted the stock, in violation of the agreement. The relevant provision of the agreement provides:
Separate Purchasers, Not Affiliates. Purchaser is a separate investor; no Purchaser is acting in concert with or as a group with any other Purchaser or any other person in connection with the purchase of the Securities pursuant to this Agreement. . . . No Purchaser nor its Affiliates has an open short position in the Common Stock of the Company.Id. ¶ 2(j). In support of its contention that plaintiffs acted in concert, defendant argues that all three plaintiffs sold their stock at some point between September 12 and October of 2000. Defendant also contends that the same Canadian brokerage firm, Canaccord Capital, directed the short sales of two of the three plaintiffs. Alpha Capital and StoneStreet.
Even taking defendant's allegations as true, this still does not rise to even a colorable claim that plaintiffs acted in concert in violation of the provision. The provision prohibits concerted activity at the time of the purchase of the stock. Here, defendant has presented no evidence that plaintiffs acted in concert when purchasing the stock. The fact that the plaintiffs all happened to sell the stock within a month of purchasing it or that two of the three used the same Canadian brokerage firm does not alone support a finding that there was some explicit or tacit agreement between the plaintiffs at the time of the purchase. In any event, as discussed earlier, there has been no evidence presented so far that plaintiffs, either acting alone or as a group, violated any terms of the contract by simply selling their stock. Defendant has presented no evidence beyond bald assertions that plaintiffs fraudulently induced defendant into the contract by acting in concert at the time of the purchase. Without such a showing, the language of the contract clearly provides for the exercise of the Warrant stock. Consequently, this Court finds that plaintiffs have shown a "clear" or "substantial" likelihood of success on the merits.
As noted earlier, plaintiffs also must establish that they will be irreparably harmed in the absence of a preliminary injunction. Irreparable harm is found where there is "a substantial chance that upon final resolution of the action the parties cannot be returned to the positions they previously occupied." Brenntag Int'l Chem., Inc. v. Bank of India, 175 F.3d 245, 249 (2d Cir. 1999). As a general principle, monetary injury does not establish a likelihood of irreparable harm as it can be estimated and compensated. See id. However, "preliminary injunctions are proper to prevent a defendant from making a judgment uncollectible."Republic of Philippines v. Marcos, 806 F.2d 344, 356 (2d Cir. 1986). "An exception to the general rule exists when it is shown that a money judgment will go unsatisfied absent equitable relief." Alvenus Shipping Co., Ltd. v. Delta Petroleum (U.S.A.) Ltd., 876 F. Supp. 482, 487 (S.D.N.Y. 1994). A court may properly find that irreparable harm exists where nothing in the record suggests that a defendant \\ ill be able to pay a judgment. See id. (granting plaintiff a preliminary injunction after finding that plaintiff demonstrated irreparable harm as nothing in the record suggested that defendant could pay plaintiffs likely future award); see also Seide v. Crest Color, Inc., 835 F. Supp. 732, 735 (S.D.N.Y. 1993) (granting a preliminary injunction preventing defendant from selling assets where the plaintiff likely would be unable to collect on a judgment against defendant if assets were sold); Brenntag Int'l Chem., Inc., 175 F.3d at 250 (finding irreparable harm present where the obligation is owed by an insolvent defendant).
Plaintiffs argue that they will be irreparably harmed absent injunctive relief as defendant likely will not be able to pay a judgment at the conclusion of this case. In support of their argument, plaintiffs contend that defendant's own registration statement filed on October 7, 2002 states that defendant has no source of product revenue, and that defendant has incurred a deficit of $46,364,951 since its inception as a company. Defendant's registration statement also indicates that defendant anticipates that its deficit will only increase. Defendant's registration statement further indicates that due to the uncertainties involved in obtaining FDA approval for commercial drugs, it is possible that defendant may never be able to sell Product R commercially. Defendant is currently in the process of seeking further necessary investment capital.
Further, plaintiffs point to a clause in the Warrants which states that in the event defendant refuses to issue the Warrant stock, remedies at law are not adequate to compensate plaintiffs and plaintiffs are entitled to specific performance of the Warrant agreement. The relevant provision in the Warrants reads as follows:
Remedies. The Issuer stipulates that the remedies at law of the Holder of this Warrant in the event of any default or threatened default by the Issuer in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate and that, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise.
Alpha Capital's Order to Show Cause, Exh. B ¶ 15 (emphasis added). Although a contractual stipulation to the effect that irreparable harm exists is not itself dispositive, the Second Circuit still gave great weight to such a provision in Ticor Title Ins. Co. v. Cohen, 173 F.3d 63 (2d Cir. 1999). The court in Ticor found that a provision in a contract stipulating that irreparable harm will result from a breach "might arguably be viewed as an admission[.]" Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 69 (2d Cir. 1999) (upholding a permanent injunction in an employment contract where the parties had stipulated in the contract that a breach of a non-compete provision will cause irreparable injury).
Here, not only is there a contractual provision in the Warrants stipulating that remedies at law are inadequate and that specific performance is appropriate, but plaintiffs have also demonstrated a substantial likelihood that defendant will not be able to satisfy a judgment at the conclusion of this case. Plaintiffs have therefore demonstrated that they will face irreparable harm absent injunctive relief. Moreover, given the litigation between the parties here and in Florida, the balance of hardships tip decidedly in the movants' favor since even if defendant is ultimately successful in Florida, it can be adequately compensated by damages or further injunctive relief on its behalf.
Defendant's argument that issuing the limited amount of stock called for by the Warrants could have serious dire consequences for the company and its stock price is purely speculative and not supported by the stock's history or any specific proffered evidence.
Accordingly, plaintiffs' motions for a preliminary injunction are granted. Each plaintiff is ordered by this Court to post a bond of either $100,000 or the market value of the amount of Warrant stock when issued, whichever is higher. This Court further orders that any proceeds of Warrant stock subsequently sold by plaintiffs must be placed in escrow pending final resolution of this case. Plaintiffs have already agreed that such conditions would be appropriate upon the issuance of a preliminary injunction. It is further ordered that upon plaintiffs' exercise of the Warrants on the Second Determination Date, defendant as well must turn over the requisite amount of stock in accordance with the formula set forth in the Warrants. Again, plaintiffs are required to post a bond in the amount noted earlier, as well as place in escrow any proceeds of Warrant stock subsequently sold.